What Is a Nash Equilibrium?

From the stag hunt, we know the definition of Nash equilibrium. But what is a Nash equilibrium exactly? Why is the concept important? How does it relate to the real world?

Takeaway Points

Technically, a Nash equilibrium is a set of strategies, one for each player, such that no player has incentive to change his or her strategy given what the other players are doing. (This is the definition of Nash equilibrium from Lesson 1.3 of my textbook.)

Practically speaking, a Nash equilibrium is a law that no one has incentive to break even in the absence of an effective police force. In a sense, these laws are self-enforcing.

Following traffic signals is an example of Nash equilibrium at work. When another car is speeding toward you, you do not stop at the red light because a police officer will give you a ticket if you go. You stop because you do not want to die.